tv Key Capitol Hill Hearings CSPAN April 11, 2014 8:00am-10:01am EDT
connection versus my next best connection. when you start to look at it that way the a. leverage they have over providers becomes very, very narrow. the only way they could stop that is by monitoring all -- decide oh, i'm going to hurt this provider, and i'm going to figure out where they are by monitoring 8 thousands of my connections and figuring out which -- with traffic of thousands of different kinds of streams, and i'm going to pick on the this provider's stream out of that stream and discriminate against that. >> you are saying that would not make sense as a business proposition and would be technologically difficult. >> and barred by law under comcast agreement under the nbc agreement under the merger. yes. absolutely. technically very hard to do. really bad idea from a business sense, and, in fact, many cable companies, cable vision said publicly in the "wall street journal" they may get out of the programming business and just carry people over the top players because the program costs are so high. why should they be squeezed in the middle? why not allow over the top
providers to negotiate on a much broader basis? that's part of the dynamic change in the world we're living in. >> thank you. my time is expired. thank you, madam chair. >> senator bloomenthal had one follow-up question, and senator franken and i will leave my questions to the end. >> i much appreciate that, madam chairman, and thanks also to senator franken. just a quick question. you and i agree that the cost of sports programming are rising, in fact. they are rising astronomically and should better reflect consumer demand. really aren't consumers the best judge of what a fair price for programming should be and wouldn't prices come down if they had more choice, specifically the way to break this cycle of ever increasing costs for sports programming instead of give consumers some more choice through ala carte programming, and i wonder if you
could comment on the potential effects of disciplining the market and bringing down the costs of cable as a result of ala carte. >> thank you. i truly believe you are correct. i think that one of the concerns that wasn't addressed earlier was that we have numerous studies that show with vertical integration we end up with higher prices on the regional sports channel that is are integrated than the ones that are independent, and one of the related concerns there is that competitors who want sports programming in that market have had a very difficult time negotiating a reasonable price for that even if the price is higher than it should be. so it seems to me one of the things to look at, as you have recommended legislatively more broadly is to offer channels ala carte, offer more programs ala carte, give consumers the choice as to whether they really want to prey pay the price that is being passed through. >> thank you, madam chairman. >> thank you very much, senator franken. >> thank you, madam chair, and i
have three questions. it'soning if i go over a little bit? >> you would not be alone. >> mr. cohen, i'm worried that this deal simply continues a trend of media consolidation, a trend that's led to increasing prices for consumers that have seen their bill go up more than twice the rate of inflation since the mid 1990s. earlier this week news broke out about a jp morgan report in which wall street analysts apparently recommended the cable companies continue to raise prices on consumers, and as you have admitted, prices might go up even faster. we've talked about your comment. mr. cohen, don't your investors, people invest in comcast, expect
comcast to leverage its market share by getting as much money as it can out of consumers? >> i think our investors want us to have the best multi-channel video and broad bant business in the country, and i think that includes getting whatever prices the market will bare, but it also includes providing an xeerdly high quality video and broad bant experience, and i think we have made -- you can look at our analyst calls. we have made it a point of significant discussion not only for us, but for the entire cable industry about our need to continue to invest to be able to compete better against national and global competitors who are increasingly coming into this space. where he to your question, but also to be fair, yes to the business reasoning underlying this transaction, which is to
provide us with the opportunity to create a better experience for consumers. >> well, my concern is that as comcast continues to get bigger, it will have more power to exercise that leverage, to squeeze consumers, and part of the reason i'm concerned about this is because comcast's own cfo has told wall street that that's what comcast does. during a fall 2012 conference call an analyst from goldman sachs knowing that cable had a big share of the broadband market, and asked comcast cfo "is there a way to exercise pricing leverage to a greater extent? comcast cfo said, "i think that we have actually exercised some pricing leverage. we've increased the costs of the service by roughly $4 to $5 per customer per month over the last
pew years." it's understandable that comcast has responsibility to look out for its investors, but i'm concerned that the bigger and more dominant the company becomes, the less incentive they have to look out for consumers. and the more power they have to squeeze them. mr. kimmelman -- i think this goes to bundling too. i know that in some of those talks right after the talk of the acquisition there was pledges to push bundling, to up sell your product. mr. kimmelman, won't this give
comcast more leverage? >> absolutely, senator franken. they're giving us examples of things that show the market is highly concentrated but not monopolistic. we did use the numbers in our analysis. there's enormous market power that could be leveraged, and on top of that, there is the very popular nbcu programming. that can be leveraged. that, understandably, maximizes profits for comcast to keep it in a big bundle, to charge as much as possible, and the increasing trend for consumers is to buy at least two services. broadband and video, if not three. so they know that they can drive up prices to competitors and benefit from raising their rival's costs and if some people want to drop those rival services, says most likely going to be business going to them.
that is where their financial senate lies, and we would expect them to follow through on that. those are the kinds of concerns that on the public record where in the fcc ruling on nbcu and comcast, and in the doj and i imagine they would be relevant here as well. >> senator franken, can i jump in on that? >> sure. >> thank you. >> understandably, this is a really complicated matter. i think if we boil it down, the folks at home that bills keep going up, are expecting more. they're not getting more channels and they're not getting more choice, and so, you know, mr. cohen pointed out that, you know, content costs are up 98% while their subsubscription fees are only up 50%. that's extreme pressure on their gross margins. any business owner would know
that why -- what's the incentive to add more product when it's your highest gross margin product and it's your number one cost? there has to be effecttivity ways to encourage the marketplace. the marketplace we're going into is $170 billion marketplace. it's larger than all four major sports combined. there are 60 networks that are fighting over that space in the sports area. the golf lifestyle market has won, and the only channel is that of golf channel, which is owned by mr. cohen. now, a good real world example that i think everybody ought to know of how hard it is for original programmers is that we understood that golf channel was owned by comcast, so we didn't start there. they didn't have a huge incentive to launch us, but what we did is we started with time warner sxabl some other folks.
time warner cable from the ceo to the programming people could not have been more constructive in their help to help us get our programming on the air. as soon as this merger was announced, that definitely softened quite a bit. i'm sheer that time warner cable did a wonderful job trying to get more products to the consumer, and since that time when this was announced, it's become a lot more difficult for us. the only thing i can think about is because they own the only competitor in the space. >> thank you for your indifficulting ens, madam chair. you look surprised, mr. cohen, when i talked about upselling and bundling. neil schmidt, an executive at comcast, went on a phone call with a wall street analyst and said this. "as i said i think the re new synergies are greater than the cost synergies. on the revenue sin erj jis side
the fist would be in the residential area where we would seek to bundle more and that is call center training. that's teaching people to sell another rtu on a call, on a service call, fix the billing problem. up sell a third product." so just bundling burt. that's what i was talking about. you look kind of puzzled when i brought it up. >> i wasn't sure what you were referring to. i think obviously for us and for others m cable industry have been valuable for and yous something consumers like. >> you were told by the fcc to actually stop that and to stop pushing bundles and -- but i got other questions. >> okay. >> i wanted to be very short, and i know sometimes i'm too long. i will say that the fcc did not tell us to stop bundling and pushing bundles.
they simply asked us to have a stand-alone broadband offering which we did have and which we continue to have. >> the fcc sent you a letter saying that a consent decree imposes a detailed plan that requires comcast to take numerous and training its customer representatives and retail salesperson nell to reinforce their awareness and familiarity with a performance starter service. >> that's the single -- the deal was we would create a new broadband service which was a stand-alone service, six meg down, for $49.95 a month, and we did create that tier, and the commission raised concerns about how we were marketing the tier, whether our call center employees knew about it. we quickly resolved the matter. we may have had a difference of opinion. we quickly resolved the matter, extended the commitment for another year so -- >> you paid a fine.
>> we did make -- we did pay a fine. all i'm saying is there was no -- >> and you were told -- >> no prohibition. >> tell your call center people to emphasize the stand-alone, not to upsell. >> offer. >> very different to the condition. >> we were offering. nothing in the fcc order to prevent us from bundling. i just want to say that we agreed in addition to our bundling strategy for somebody who called and said i only want to buy broadband to have an option, stand-alone broadband option. >> when you train people to upsell, you are not training them to make people want to go for the stand-alone broadband. something that you were fine for not doing. >> we are allowed to train people to upsell. all we have to do is when somebody says i want to buy broadband alone, that our call center employees have to be aware of the stand-alone product and sell it to people. >> you seem like a pretty good salesman, and i know people on
call centers can emphasize certain things over others, and i think that's my fear here. i want to talk about two other things. i am so sorry, madam chair, but mr. kimmelman, comcast has argued that this deal won't jeopardize the open nature of the internet. in the public interest statement that it filed with the fcc yesterday, comcast promised regulators that it has no incentive to enter fear with internet traffic. if this goes through comcast will control 40% or more of the broadband market, and it won't just own all those pipes. it will also own a bunch of content because it bought nbc universal a few years ago, and the 20 or so cable networks that came with it. mr. kimmelman, doesn't that give comcast both the power and the incentive to manipulate internet traffic in its favor and didn't we see a preview of that with
the recent deal comcast struck with netflix. >> senator franken, if you go back to all the big numbers mr. cohen had and professor yu had about the many myriad interconnections of the internet all around, all accurate in that space, but when you get close to the home, to the customer, the last mile, the ports that have to bring in the video traffic, one player, two players, sometimes more, hardly ever and one of them is comcast combining with time warner. that part of the market is quite concentrated. there are a lot of changes going on in the internet. there are a lot of different kind of interconnection relationships. what we also see is a lot of proposals for usage-based pricing that wasn't there before. data caps. >> can you explain what those are? >> just that instead of getting a flat fee for eat as much as you want for your internet
usage, that above a certain level, your prices go up. or you pay per certain a. usage and -- >> unless it's a comcast product like xfinity. >> there are some products that are dealt differently with by cable companies and under different set of standards and arguably preferential to what a competitor has. there are dangers when the market is concentrated at that point of ways to manipulate, and this is where i go back to my analogy of an octopus that has all these tent cals out there. there's net neutrality, and then there are the different pricing schemes and then there are the different interconnection and arrangements. there are many ways in which a number of tentacles could be used to favor one product over another if it's financially advantageous to that broadband provider with market power. that would be comcast time warner. >> i have one last question, and it's going to be short, i think.
>> you have a section called promises changed and promises kept. you say when we make promises, we keep them. you talk about the conditions that the fcc imposed on comcast when it acquired nbc universal, and here is what i found puzzling. you say out of these conditions, the fcc has only found it necessary to look at one issue, and that was the issue we just talked about on stand-alone broadband. isn't it that they looked at neighboring -- isn't it the condition that prohibited you from favoring nbc content. when cnbc is neighborhooded, you were neighborhooding it with all the other 24-hour cable news
channels with cnbc -- w thbs with msnbc, fox, cnn, but you put bloomberg way out in the nose bleed seats. people couldn't find bloomberg. because they couldn't find bloomberg, they wouldn't go to bloomberg, and bloomberg could charge less for its advertising and nbc would get more eyeballs for people who were interested in 24-hour business news, and you could charge more. isn't that another condition that -- that they looked at? >> sir, generally speaking, that characterization is just not accurate. what we had in the bloomberg neighborhooding area was -- were interpretive differences between bloomberg and comcast as to what
the condition meant. >> the fcc certainly looked at it, didn't it? >> there was a complaint filed, and when we lost at the fcc, we have resolved the matter with bloomberg. we are in compliance with that condition. >> let me ask you, is this true then that out of these conditions, the fcc has only found it necessary to look at one issue. is that still true? >> what is true is that we only had a compliance issue with one condition. that bloomberg issue is not a compliance issue. it was an interpretive issue. when the interpretation was resolved we were able to resolve our differences and our partnership with bloomberg. we remain bloomberg's largest distributor and we have an excellent -- >> here is the fcc's order. in this memorandum opinion, an order. we affirm media bureau orders that direct comcast that plays
bloomberg television in news neighborhoods consistent with the condition of the comcast nbc universal order. that is looking at that. we have right here in your testimony and you're sworn under oath here you say out of these -- brackets conditions. that's what we're referring to. the fcc has found it. only found it necessary to look at one issue, and you're saying they didn't look at this issue? >> i'm saying it was not a compliance issue. it was an interpretation issue. >> i'll give you an example. the out order of the media bureau was that we had to neighborhood bloomberg where i believe it was either four or more or five or more other news channels. the fcc order didn't have that
definitional issue. we didn't know what a news neighborhood was. we tend not to neighborhood our news channels the way you described in your question where all the news channels are together, but what are the interpretive issues that we needed to have resolved was what was a news neighborhood? that's what -- that's what the dispute in front of the commission was. >> madam chair, this is the end. my friend. >> by the way, any of the witnesses have to use the rest room, we really can come back, and i know it's been going on a couple of hours. >> you really undercut my big conclusion. i was going to say -- >> senator franken, please continue. i really meant that. i was just going to let them know. >> i was going to say that i think the interpretation here is on what the look -- word look means. i think everyone knows what the word look means. >> if i can, i will acknowledge
that the word look may not have been the best chosen word. the point i was trying to get at was whether there were compliance issues, and i don't think that was a compliance issu issue. ly acknowledge that we needed a better use of words. i apologize for that. >> accepted. >> thank you. >> i have a few more questions. i wanted to follow-up on what some of the other senators have asked about and the first thing was about what senator graham was asking about, the wireless competition. i guess i'll start with you. in the anti-subsubcommittee -- anti-trust subcommittee hearing that senator lee and i had about wireless competition, witnesses agreed that a wireless is out there, but it's not yet a substitute for wire line. there is a discussion about you can have these alternatives with wireless. do you think that's really true in a big way? >> i would like that to be the
case. i don't see it now. professor yu has indicated that the speeds are increasing. the service is better. the technology is better. when you look at the price for the major wireless providers with their data cap for wireless compared to a comcast price, for example, the price for the same amount is about ten times higher. that's not what i would usually think of as a good consumer -- >> you mean to get that kind of high speed data. >> yes, exactly. >> we're hopeful and maybe that would be the future. again, as professor yu has admonished us to be more careful about what conditions we put in, transactions with predictions of the future, i'll just say that we have to also be careful about polyanish predictions about levels of competition. 15 years ago we thought there would be video over energy company wires, and we had a few of them. there's rcn out there, but not much. some of the predictions can be wrong going the other way as well, and maybe this is the kind
of thing where for wireless to be a real competitor, we ought to wait a few years and see if it really develops that way. >> mr. sher win, you haven't been able to talk very much here. you look like you want to say something. >> i do. first of all, most of the discussion has been about programming, and that's out of my baileywick, but when it comes to wireless, that's in my baileywick, and the technology is such today that if fiber -- or with any kind of fiber or some kind of back haul is brought to a building, especially a multi-family building, then the resident can have speeds of in excess of 100 megabits per second wirelessly. i think that's an important point. the technical knowledge has caught up. it is not the cellular wireless, as you know it, and that i think is what professor yu is referring to. it is wifi wireless, and that is a big difference. >> though it wouldn't be capable of carrying the -- or it would
cost more. i'm trying to figure out here. i understand the difference between wi-fi and cellular, but are you saying it wouldn't have the same capabilities as the cable? >> i'm sorry. i'm asking. are you saying one of the things -- points that mr. kimmelman made was that it's a lot more expensive if are you going to get that kind of data coverage and -- >> that is actually not the case. if the back haul is reasonably priced in a family residential situation, wireless is 30% less expensive than wired. that's number one. number two, it offers much more capability, much more functionality. not only is it less expensive, it has greater functionality, and there's no need for cap if the back haul is done correctly. >> mr. kimmelman, you want to respond? >> i can't disagree with mr. sher win for a specific set
of circumstances he is describing, and he is also describing circumstances where he faces a bottleneck of being able to get the wholesale product so that he can deliver that service at a lower cost. also -- >> only in comcast areas. >> the other interesting issue, if you go down this path with all the increased need for wi-fi downloading because of limit to spectrum, all the wireless carriers also ultimately very much need a wired service to connect get closer to the customer. many of those are owned by comcast and time warner or by some of the phone companies. there are other choke points here that need to be looked at in terms of cost. >> i agree with that. >> one follow-up on the advertising questions that were asked. professor, you talked about 8%. >> 7. >> 7% of the market was cable, and so there was a wall street journal article quoting an snl
kagen, and they said that a small local advertisers are worried about facing higher prices because they would have roughly -- comcast would have roughly half of the ad sales market. what is this about? half paired to %? is it just a different market you're looking at? are you including everything. >> i'm looking at the s.e.c.'s video competition where they do an assessment of different sectors on a national level and local level, and nationwide numbers, what they're looking at is that the total local advertising budget for cable is 7%. >> thereby district of columbia there's possibly submarkets where they don't have as much choice. >> anyone agree with that? i will get back to you. >> all i would add is, you know, our ad sales business tends to be about one-third local, one-third regional, and one-third national in terms of
how we sell, and clearly on the national front there are a number of competitors, and on the local and regional front we've actually been the competitors who have gone in and we've competed against broadcasts stations, et cetera, and there are also with on-line and the ability to target lots of different avenues to reach customers from an advertising perspective. >> okay. mr. kimmelman. >> i'm sorry. >> yeah. >> it makes it difficult when the quasi public utility also has 50% of the ad market space, and also controls the content. so that will make for higher prices? >> higher prices, less choice. >> one thing that's a little off on this, professor yu, different topic, but in your testimony you talk about how the emergencier doesn't pose competitive concerns because there's no geographic overlap, there's been a lot of discussion about this between the two cable systems.
under this theory would consolidating all nonoverlapping cable systems in one or two companies be of concern to you if that happened in the country. >> to be specific, in the testimony cable operators basically serve three purposes. they sign up subscribers to individual households. they contract with cable networks and they sell advertising. the point about the lack of overlap refers to the transactions between cable companies and end users. in that sense mergers do not have an impact -- different areas do not have an impact. you do have to do the separate analysis of the markets in which you do local advertising, which is the same but with respect to programming, if you didn't merge to monopoly, you would see an adverse competitive xwashgt impact in that market. then you do the anti-trust analysis to look at the various concentration levels. to pick p the conversation before, one of the interesting questions is what is a real competitor to cable broadband? then we've heard this defined different ways.
one of the interesting things is mr. kimmelman says we should not worry about -- we shouldn't speculate too much about the future. let's think about facts. one of the interesting facts is 10% of american citizens now rely entirely on their wireless connection for broadband, but you are seeing, in fact, in other countries they now regard wireless and fixed line as the same market for anti-trust purposes because there's so much substitution, and if you look at the directions where all these are going and the bets that companies and countries are making, it's quite likely that there's a real world out there, and that's not in the future. it's today where wireless is for increasing number of americans every year a real substitute for fixed line broadband. >> i have a few specific questions here. comcast has experimented with data caps and usage-based price aring for its broadband service and is testing new usage based pricing, and for you, time warner cable tried using similar caps, but quickly abandoned
them. >> we actually took the approach that it's an unlimited service unless you would like to reduce your bill by $5 a month if you agreed a cap. i think what -- i'll let mr. cohen jump in, but i think the market is very much a test and learn mentality right now. we've had our usage base caps out there for a while. we've seen some uptake in them, but we -- where we have landed is the unlimited tier, giving people the ability to have an unlimited tier with a right to reduce the bill if they agree to a cap. >> okay. prior to the merger, time warner cable also spoke positively about giving its consumers complete access to their channel line-up without requiring a set top box rental.
consumers would then have their choice to watch all the channels using either apple tv, xbox, or any of the other internet connected devices, and it would create a far more competitive system. in contrast, comcast new internet connected x one set top box seems to create a more closed ecosystem where only comcast approved apps and contents are allowed in. i thought it was interesting that you guys were willing to give up that cable box and what moefsh ated it? how does the decision benefit consumers and what's going to happen if the merger is approved? >> sure. i think what are you seeing in the marketplace is lots of different approaches to delivering the video experience in the home. i think you will always have the set top box experience for that portion of the population who likes totwo-way interactivity of the set top box, and there are certain features like the next generation guides, et cetera, that work best or only work in
some instances on the new set top box. >> but you announced you weren't going to require it. >> well, as the home evolves and there are often multiple tv rooms in a home, what we have been comfortable with is allowing our customers to bring their own device, whether it be to your point a roku or a similar device and let them consume their content on that device. what we have found is often what you have is one room of the house has a set top box, two-way interactivity, and then you may have another room where people are fine running the video experience. for example, off a roku. again, this is a portion of the market that continues to evolve with really new devices coming out. it feels almost monthly at this point. >> senator, if i could, just two sentences. just to be clear, comcast is offering the same experience maybe on different devices. so part of the x1 platform is
the ability to watch in the home the content that is available -- the content that is available, all the live channels anywhere in the home on -- >> is it more of a closed system with just the comcast -- >> i think it's the same system, and a lot of this is programming rights issues. >> we'll do some follow-up questions. >> so i think we're actually doing the same thing just on different devices. >> we'll have some follow-up questions on the record later on. comcast and netflix, mr. cohen, reportedly announced a paid pairing agreement earlier this year where for the first time netflix will pay for a direct connection to comcast network that provides more reliable delivery of netflix content to comcast subscribers. i know netflix called this an be a temporary toll his. was forced to pay. comcast called it a commercially necessary agreement.
why charge both netflix and your consumers for this service? and then i want to ask mr. kimmelman about this paid peering. >> your statement is 100% correct. for the first time netflix is paying for connection to our internet backbone directly to us, but netflix has always paid for connection to our internet backbo backbone. all edge providers pay for connection to the backbone. this is not net neutrality. it doesn't deal with a part of our service that goes to the last mile. this is how internet edge providers connect to the internet backbones of isps, and since the internet was born, those are paid transit relationships, and as professor yoo said, in comcast's case, comcast has agreements with 40 companies for settlement-free peering. they, by the way, go out and sell access to their networks to connect to the internet. so even though they're not paying us anything, they're
charging internet edge providers to be able to connect to our isp as well as everyone else's. we have over 8,000 free and -- free peering and paid arrangements, and that market is intensely, intensely competitive. in the netflix case, i hate to say this, this was netflix's idea. netflix is responsible for 32% of the traffic on the internet, and they woke up one day and they said, wait a minute, we have 32% on the traffic on the internet, why do we have to pay a middle man to get access to comcast, time warner cable, at&t, verizon? why don't we cut out the middle man, have a direct relationship, and potentially save ourselves some money? that's where that agreement came from. that is, the netflix's desire to pay us directly and cut out a middle man. now, as it turns out, that was a smart thing, i think, for
netflix to do and for us because having the direct relationship gives us a better ability to work together, to manage the traffic, and make sure that netflix customers who are our customers are getting an optimal viewing experience. so once again the customers are the winner here. you have this intensely competitive backbone market. we talked about price a lot. pricing in that market, which again has existed since the birth of the internet, pricing has dropped 99% in the last 15 years. so this is a market that's working. it is not a market that's dysfunctional. it's not a market that's impacted by this transaction. and i think consumers end up being the big winners when we let markets like this function the way they were intended to do. >> well, whose ever idea it was, does this kind of paid peering exist in other parts of the world, and how do you think it could impact innovation? >> well, it certainly has --
peering is a form of interconnection and it's a barter exchange, so these are forms of interconnection. some of them paid, some have been just a barter because of traffic arrangements, and the world is changing. as more video streaming is occurring, what happened with netflix was an enormous success for them as they went to original programming. they became increasingly popular. without getting -- they don't seem to be too happy in the way mr. cohen is, but leaving aside the companies, here is the point i think that is important related to the transaction and for the committee to consider longer term. as you have vertically integrated companies with their own programming and their own desire to bundle the channels and charge as much as possible, as others come in with internet delivered programming that could come pete, what are the ways they may want to advantage their own, drive up their competitor's costs, make it more complicated and reduce quality for their competitors? not saying any one arrangement
necessarily does it, but these are the kinds of competitive concerns we think oversight official s should look at. >> you're talking about what i referred to early as the next netflix which is still a dream in a garage and just that we have a structure that works to promote this kind of innovation. >> exactly, senator. >> one last thing, mr. minson, i understand that time warner cable has a business service called ethernet, is that right? for which it offers wholesale access to its competitors. competition like this is critical. i know we have said this many times up here just because we believe it creates a market that provides best prices and best services. a high quality and competitive internet services are especially important for small businesses in our economy. can you explain why offering wholesale access is good for time warner and good for consumers and i guess i'd ask if comcast has a similar offering and why the combined company continue to offer this? >> sure. our ethernet service is part of
our overall business services offering. to date our business services, we get the vast majority of our revenue from small businesses, businesses with less than 25 employees. as we have expanded in the marketplace, we have gone to sort of more midmarket and enterprise market where you will see these ethernet type arrangements happening more in the enterprise space. what it does is it allows competitors and peers to come into the marketplace and have that product offering, and it's certainly something that we find a return for our investors and something we continue to plan on doing. >> so, senator, actually, if i can, a few sentences just to say it's the first time small and medium-sized businesses have come up in this hearing, and when you talk about the benefits
of competition -- or the benefits of this transaction, the scale and the investment, as mr. minson said in his opening statement, the impact on the market for small and medium-sized businesses to get telephone and high speed data services will be substantial as a result of this transaction. it's one of the big pro competitive benefits that i just want to underline and put a yellow highlighting through. in terms of ethernet, we have a product we call metro ethernet which we have also started to roll out. again, it's a product we market to larger medium-sized businesses. we are -- we also have within that product a managed service which does permit wholesaling of that service, and we've got a few dozen customers in that space. frankly, it's a service that we talked to spot on about about a year ago and never reached an agreement with them to be able to offer that service.
so it's a market that we're just beginning to be in. i don't know that we have as fully developed an opinion as time warner cable might have about that, and it's not -- this is not something we discuss during the pendency of the transaction, so i think my answer to your question is that we don't have an answer yet about how extensive we think a managed -- what we would call a managed service under our metro ethernet service would be something that we'd make available on the market. >> okay. mr. sherwin? >> we are a customer of time warner's metro ethernet service as well as their cable service. we buy a lot of services from time warner and telecom. we buy it wholesale, and we buy almost all of our services from time warner wholesale. i think that may be largely due to the conditions that were placed on the aol/time warner merger by the ftc back when that
occurred. our big concern is that that has been very advantageous for us and we think it's been advantageous for time warner. we're hopeful that when this merger occurs, that there's a condition placed that the conditions will continue to be enforced and monitored because it's helpful for us to provide a competitive service in buildings where the bigger providers are. >> thank you. i was thinking when mr. cohen was referring to small businesses, you probably consider yourself not a huge business there, mr. bosworth. >> no, we're not. >> there's a lot of independent contractors that are the focus of this hearing as well. do you want to respond? >> yes, thank you. we've raised $30 million from individuals, a little bit over that, and one of our only remedies right now is to go out and try to raise another $30 million to litigate, and that just shouldn't be the avenue in order to provide consumers with
a choice, and i have heard litigation mentioned a bunch and i have heard a lot -- i'm not an attorney, but that doesn't seem like a fair and competitive marketplace. another thing i wanted to address is in the nbc/universal merger, none of the independent network that is were launched, and we applaud the diversity angle, back nine is bringing many more people into the game, people that have been excluded in the past, so we want to bring them into the game. so we applaud that. however none of the independent channels that were launched were in direct competition with any of the channels that they own. the last point i wanted to make is that the 160 independent network that is they referenced, if you strip away all the different networks that either have affiliations with distributors, channels, and/or media conglomerates, it's less than 20. so truly -- >> that's simply untrue, senator.
>> okay. mr. cohen and mr. minson, if you could have a chance to respond when you're done. >> thank you. >> and then we're going to turn over to senator lee for some closing. >> and the productive meeting that mr. cohen referenced that we had two days ago, we were given nothing with zero promises and the only thing that went on was they said we'd like to keep an eye on you for the next 24 months. now, potentially that's maybe our fault, maybe we didn't do a good job, but the constructive conversations that we've had with other distributors that gave you specific feedback, when you're a market maker and you own the toll, you give zero feedback as to how to be successful, and then you say let's keep an eye on you. when you know for a fact what was called in the last i guess last hearing a ripple effect. they're essentially market makers. so people look at you to say where the market leaders goes, and so when you're giving zero
feedback and perhaps, you know, let's just keep an eye on you, for a small business that's raised independent dollars, it puts you in a very tough spot. >> okay. mr. cohen? >> i think -- all i'd say is the statistic of 160 independent networks is 160 channels that are unaffiliated with any of the broadcasters, major media companies, et cetera. and, again, i'm going to stand by our record of support of independent programmers because i don't think there's a company -- i don't think there's a distributor in the industry that's done more to support the launch and ultimate growth of independent programmers than comcast has. as i mentioned, we've increased distribution for 120 independent programmers in the last three years alone. and by the way, i'm very proud of our networks, and i have a lot of respect for mr. bosworth, and, frankly, i don't
participate in program affiliation negotiations. you'll all be pleased to hear. but my folks are telling me these are productive discussions. this is a network we might end up wanting to launch, might want to be part of our system. they, however, are not in competition with the golf channel. >> i'm going to let you negotiate after -- >> can i just mention -- >> i am going to just finish up here with mr. minson and i really appreciate your testimony and i think that if, in fact, the negotiations are productive or not, we'll see if we can get the channel, right, mr. lee? and i think you two should talk about it later. mr. minson. >> thank you. i just wanted to respond to a lement ..h. in terms of us providing services to mr. sherwin's company, that is not -- that does not have to do anything with the merger. if it makes business sense to do it, we have done it. provided they are in compliance with our overall terms and
conditions as a reseller. one point i just wanted to address, too, is mr. sherwin addressed buying services from time warner telecom. not to overly complicate things, but that's exactly a separate publicly traded company headquartered in denver. >> right. >> as relates to the back nine network, a couple things i just want to address. previously mr. bosworth indicated conversations stalled as a result of the comcast transaction. that couldn't be further from the truth. between signing and ulte cl we are obvious acting on her own to make all of those decisions. it would be inappropriate for us to be consulting at all with comcast to any decision we make we will make on her own and it will be made on a price value relationship for our customers taking into consideration things like overall programming costs and bandwidth constraints that we have.
>> i'm going to let senator -- i'm sure we were going to have more questions here for the record, but i'm going to let senator lee say some closing comments. comments. >> got about 30 or 40 questions that i'd like to ask. [laughter] but given that the eighth amendment does have some application here, i'm going to forego those. i want to thank our witnesses for coming today. neither chairwoman klobuchar nor i had any expectations by the end of this in we would have everyone sing on the same page, so that part is unsurprising. but your testimony has been helpful and i appreciate your willingness to be here and to adore ou our questions. thank you very much and thank you, madam chair. >> thank you. i think all of the questions and the tasman has shown us, there are a lot of very important issues here, the issue of consumers and how they will be protected going forward. we have the issue clearly of independent programmers, and asked them which is considered
and if it is considered for approval, what kind of conditions would be place on that, and to think while this is one specific sample, i think both senator lee and i are aware of other examples of people, are concerned about that and it's not just about the independent programmers. it's about what the price is and what it does to the market, whether we're talking about that or talk about advertising, whether we talk about the wholesale pricing that mr. sherwin has mentioned. then finally of course the issue of the internet and making sure that is done in the fairways was available to everyone. we are looking forward to getting more information. i know that mr. cohen, mr. minson, your companies filed, was it 180 page report yesterday. so we will be redoin reviewing . i just want to thank the witnesses. the committee has received a number of letters from parties raising concern about the merger, including consumers union, the american antitrust institute, and others which i
[inaudible conversations] >> today, treasury secretary jack lew holds a news conference after world bank g20 nix it you can see live starting at 6 p.m. eastern on c-span. live at 8 p.m., house budget committee chairman paul ryan is the headliner at the iowa gop dinner in cedar rapids. >> the question, integration of baseball. he said it's very interesting, all of the accounts of what he
actually said and clearly means that hit series about about the integration of baseball. he says because what will happen is, he says i think what they want, they want our fans. they want our fan base. we're outgrowing the major league in games. we're packing them in. in fact we think they want our fans. you said if you want to integrate, take whole teams, whole black all-star teams into the majors. and another point he said, if they were really interested in increasing the talent of their teams, maybe someday not take just one or two players because we have bunches of players who are good enough to play a major leagues. >> satchel paige and integrating professional baseball saturday night at eight eastern part of american history tv this weekend on c-span3.
>> [inaudible conversations] >> the acting chair of the federal energy regulatory commission testified thursday before the senate energy and natural resources committee about the security and reliability of the nation's electric grid. this is 90 minutes. >> entitled keeping the lights on, are we doing enough to ensure the reliability and security of u.s. electric grid? i'm pleased to chair the first oversight hearing that this committee has had in quite some time on this important subject. this subject is important to many members of the senate.
has recently indicated by letter sent on a variety of different issues as well as members of this committee. and i thank the members for joining us. affordability and reliability of electricity is so commonplace in america today that most people spend little time even thinking about it, except of course when the power goes out and when the lights go off. whether for a few minutes, a few days or a few weeks, it can be inconvenient, it can be maddening, and it can be also life-threatening. in a small neighborhood just a few blocks from the new york stock exchange in 1882, thomas anderson's pearl street station in lower manhattan eliminated 400 lamps -- thomas edison. in homes, offices and businesses for the first time for 85 customers. it was indeed a glimmer of our electricity would come to dramatically change and improve,
and strengthen, our country and make our daily lives more convenient and more prosperous. the u.s. electric publication rate steadily increased -- electrification rate, from a few percentage boat and early 1900s to about 70% in the early 1930s. but at that point only 10% of rural households in america had electricity compared to 90% of the urban homes. with government action and great effort on the part of many parties, rural electrification wrapped up and was near 100% by 1960. during the 20th century electricity production in the u.s. shifted from being produced primarily from coal and hydropower to a diverse mix of coal, natural gas, nuclear, petroleum and recently, other renewables. with the rapid development of new technologies 50 years from
now, we can be certain there will be even more diversity in the energy sources to power our country. however, the economy and technology rapidly evolve our dependence on electricity only grows. think about your average day and how much we all rely on electricity. the alarm clock are charged cell phone that wakes you up in the morning, the coffee pot the bruce your morning coffee, the toaster warms the bigger, the refrigerator the keeps fresh fruit, traffic lights that make your commute to work safer, or the phone that used to stay in contact with friends and family to conduct important business. that's just to mention a few. there are just a few of the ways we rely on electricity in our daily lives, a power outage of even a few minutes can be a terrible inconvenience, a costly occurrence or it could be a real threat to public health. particularly when temperatures are very high or very low, or
the aftermath of storms, disasters, hurricanes, floods, tornadoes, mudslides, fires. in louisiana we felt the impact of long-term power outages after natural disasters which while understandable is still extremely difficult to deal with. today our committee is here to receive testimony about what both the public and private organizations have responsibility are doing to maintain it and to prevent brownouts or blackouts. can this grid be made smarter and safer, more secure? but doing so in a cost effective way? our first panel will focus on new and emerging cyber threats as well as long-standing physical threats to the electricity grid. this committee has already taken steps to address this issue by including in the energy policy act of 2005 a first of its kind provision to establish reliability standards, including the ones to address cyber threats to the nation's electric grid. in fact, the electricity sector
is still the only part of our national critical infrastructure that is subject to binding cyberthreat standards. we will discuss some of that today. as far as the physical threats to the electricity grid are concerned, the attack last year on the madcap substation in california's silicon valley was the most serious attack ever on the u.s. electricity system. fortunately, they did not result in a blackout in silicon valley. but the incident as it's been recorded came very close to causing a shutdown of a large portion of the western grid. i commend electric industry and its federal and state partners to fall for the significant improvements they've made to reduce risk of a physical attack since that took place but i also know that last month ferc voted to direct nerc, to address some
additional standards and give it 90 days to do so. grid reliability is responsibly of electricity industry as well as state and federal agency partners, each of us has a role to play. in my view it is essential that information regarding an attack or threat of an attack be transmitted to others that need that information in a timely, secure and actionable fashion. i would like it is time to submit a letter regarding the record and the response by chairman lafleur on this subject that will go into in more detail. without objection it will be submitted. i believe we must take very seriously these issues and develop appropriate responses to these threats, but the response must fit the size and nature of the threat. one size does not fit all. in louisiana we had two large utility companies as well as a
number of relatively small rural co-ops and, of course, municipal utilities. it just doesn't make sense a small co-op with minimal infrastructure to be subject to the same requirements as larger suppliers. we must keep that in view. our second panel will focus on different aspects of the reliability challenge, whether or not a sufficient generation and unfettered transmission to keep the lights on when electricity demand seat throughout the country. senator manchin and senator franken have been particularly focus on this issue. the adequacy of power generation differs a great deal from region to region. so rather than tackling the entire issue at once, at the request of senator manchin who is here today, we will look at the impact of coal-fired generation requirements on the reliability during the polar vortex or the vichy but i appreciate all the senators concerned regarding the threat to reliability from coal-fired plant retirements caused by new
environmental standards as well as competition from the gas markets. the question of coal retirement is multifaceted. there are different perspectives that will be shared and i look forward to a lively discussion on this question with the second panel. so in closing we have a panel of expert witnesses today to discuss these issues. senator mccarthy, i thank you for your help in planning this hearing today and for your cooperation from you and your staff -- senator murkowski. i want to thank all of you for being with us today and i will not turn over to senator murkowski for her opening statement. >> thank you, madam chair. appreciate the opportunity to discuss not only an important and critical issue but really very, very timely. a hearing titled, are we doing enough to ensure the reliability and saturday of the this grid is a central question that his post today but really everybody condition already knows the answer to this question.
we can always do more. the next a more important question than is how should we prioritize those efforts. we can judge i think by the very filled committe committeeman thg just how important this issue has become when we get standing room only on electric reliability. i think that says something about the importance of this issue. and we can judge from recent press reports that our first commitment should really be to do no harm. or at least no further harm. you have mentioned the madcap incident. recent stories about the incident and a fork report detailing critical energy infrastructure information have served to sensationalize the issue of great security. instead of helping to protect the grid from attack. the disclosures that we have seen potentially increase its physical vulnerability.
last month, madam chair, you and i wrote and asked the energy department inspector general to review both the handling of sensitive, nonpublic information and how it came to be published in "the wall street journal." late yesterday, inspector general friedman issued a formal management alert informing ferc to the fact that this information should have been classified and protected from release of the time that it was created. this revelation, with its national security implications, i find extremely troubling. i would commend chairman lafleur for taking swift action in response to this report to secure the classified information. regardless of how sensitive, national security information was handled at work, or how it found its way to reporter, and we've asked the it to find this out, the owners of the grid and the regulators are quick to
respond to incidents such as metcalfe. making use of the regulatory framework established by congress in the 2005 energy policy act, nerc provided needed information in a timely fashion. and number of government agencies including the ferc, dhs and fbi undertook significant work for the industry to promote mitigation measures. last month, under the leadership of chair lafleur, ferc directed nerc develop a mandatory standard on physical security within 90 days, even before the standards setting process was underway. we saw lessons learned from metcalf being applied, and i think that is critically important. as experts have recognized for some time, it is likely impossible to ensure that every part of the grid could withstand physical or cyber attack. we need to redouble a properly scaled and continuously improving approach to grid reliability and security.
after the facts about the universe of today's threats are clear, or perhaps a little more clear, we can debate whether new legislation might be necessary. some are interested in empowering ferc to direct emergency actions to protect the grid. i've got my own thoughts on that, but clearly the commission must do better going forward to protect nonpublic information from disclosure. but i will say it is been apparent for some time that we may need to empower ferc to protect the grid from our own federal actions. this sort of everyday vigilance is not in the not be high profile but it is important and we should not lose sight that for the electric grid, reliability and affordability must remain our core considerations. the challenge before us is how to maintain and improve reliability and affordability while keeping environmental performance imbalance. we -- as you know, madam chairman, we have a very
impressive group of panelists before us today. i thank each of you, and particularly would like to thank chairman lafleur for your steady leadership there at ferc. your extensive experience in the energy industry is indispensable as we tackle the myriad issues before the ferc, including the cyber and physical security concerns. but to each of you, and to our second panel as well, equally credentialed, appreciate the opportunity to discuss this very important subject this morning. thank you, madam chair. >> will thank you. thank you for joining me. i would like to submit for the record the document from inspector general relative to what you and i both referred to in her opening statement this morning. let me at this time welcome the panel that is joining us.
first, the honorable cheryl lafleur, chairman of the federal energy regular commission, one of for its main resource that is making the reliability and resilience of the grid. thank you for your leadership. we will have further questions. next we have jerry mccullough, president and ceo of nerc where he oversees and leads programs affecting 1900 north american bulk power system operators, owners and users picnics would like to welcome ms. sue kelly, president and ceo of american public power, he was advocating for 2000 nonprofit committee on in a trick -- in addition to others. finally, our last witness is the honorable collett honorable, chairman of the arkansas public service commission. chairman honorable is a representing the national association of regulatory utility commissioners where she served as president. welcome. thank you all for being here and
why do we begin with your testimony, chairman lafleur. [inaudible] >> push -- >> all right, that are. chairman landrieu, ranking member murkowski, and members of the committee, my name is cheryl lafleur. for nearly four years i've had the honor of serving on the federal energy regulatory commission. i appear before you as ferc's acting chairman and appointment i received in november. i'd like to thank the committee for holding this hearing and inviting me to testify. one of my first decisions at ferc was to make electric reliability a personal priority. ferc supports the reliability of electric grid in several ways. first, we directly oversee the development and enforcement of mandatory reliability standards for the bulk electric system. we also support reliability through a regulation of wholesale rates and markets which compensate resources and
sent investment signals needed for reliability, and of interstate electric transmission. finally ferc is responsible for permitting infrastructure including gas pipeline, lng terminals and hydro facilities. the reliability and resilience of the grid really stems from how it's planned planned, const, operated and how asset owners respond to and learn from events that happen. that means that instead in an overseeing reliability standards, ferc estimate ditch into nuts and bolts issues like trimming trees, all the way to the emerging issues like cybersecurity. last november, we approved the fifth generation of ferc's cyber city stand that for the first time required all bulk electric system cyber aspects to receive cyber protection commensurate with her impact on the grid. reliability also requires protecting the physical security of the great assets from
tampering, vandalism and sabotage. the topic was highlighted by the april 2013 attack on the metcalf substation in northern california. in the wake of that attack, ferc worked with other federal agencies to communicate the facts of the attack and lessons learned. ferc also provided guidance to asset owners on steps they can take to improve security based on modeling it had performed. in addition to these efforts, on march 7, 2014, ferc directed nerc to develop mandatory physical security standards for the grid within 90 today's. in directing nerc to develop these standards, we recognize that many asset owners had already taken steps to protect their critical facilities by the mandatory standard will reinforce, strengthen and broaden these efforts. we also recognize that not every facility is like. it's very important we have the
list right and protect the most critical facilities and that the response of action be customized to the specific location and circumstance. i'd like to discuss another aspect of this issue that's received considerable attention. as i noted earlier, ferc has applied its familiarity with the grid operations to perform sophisticated modeling to identify system vulnerabilities. last month, "the wall street journal" published an article that included some details of such ferc modeling. i stated then, and i continue to believe, that publication of such information about the grid undermines its security. i appreciate chairman landrieu's and ranking member murkowski's recent statements highlighting the importance of protecting this type of information. in light of the release of internal ferc modeling information, we are working on many fronts to understand what
happened and to ensure that it does not happen again. as part of this effort, i ask the department of energy inspector general to advise us on how we could improve our associate with respect to information security. yesterday, inspector general issued a management alert indicating that some of ferc's modeling work, when it was created in early 2013, should been designated as classified information, and at least at the secret level rather than as critical energy infrastructure information as it was classified. the inspector general outlined a number of specific steps to take, and we're taking them immediately and giving it a top priority. but we look forward to further recommendations and we're doing our own work and how we can improve our processes and culture to make sure this doesn't happen again. it's critical that the public have the confidence that it
sensitive energy information is protected. during my four months as acting chairman, they have been somewhat eventful and ferc has faced many challenges including the ones we are focused on today. in this area i repeatedly emphasized to the really wonderful team of folks who work there, and externally, that we have to have our actions guided by two things. one is protecting the reliability and security of the grid for customers, and second is protecting the integrity of the commission so people can have confidence in it. thank you for this opportunity to testify and i look forward to your questions. >> thank you so much. mr. colley. >> thank you. good morning chairman landrieu and ranking member murkowski. my name is jerry colley. three main points i'd like to offer to the committee this morning. the first is nerc and interested in working really hard for a
really long time to address both the physical and cybersecurity of the power grid as well as the resilience and reminded me that this is a north american international grid that we do work with. not long after 9/11, we did the first set a physical security guidelines have been the best practices across industry in terms of physical security. nerc approved a first set of cyber city standards in august 2003. as the chairman just mentioned, we just -- ferc approved the fifth generation of those cyber standards but encompass the entirety of the bulk electric system and they adopt risk-based security methods that are captured in the nist standards. we have a very robust audit and compliance program that we collect and monitor companies to our aid regions and we've been very active in ensuring that the companies are mitigating and addressing issues. so a lot of work has been accomplished in the area of
cybersecurity. him and it's also important to note that the electric industry along with the nuclear is the only industry as was mentioned previously that has mandatory cybersecurity standards. we have another little-known standard that requires companies if there is a physical or cyber incident, sabotage even suspected, that they must reported to nerc and they must report to law enforcement. in response to the ferc order of march 7 we've been working very hard and very quickly. i think the order demonstrates something i've been saying for quite sometime is that the commission does have the authority, if needed, to direct nerc to do standard that they feel is in the public interest. they did it previously with the solar magnetic disturbance standard order and of the physical security order. i think it's a good order, focuses on the most critical assets. it provides for a risk-based
approach and it provides for accountability and verification to the industry is behind the standard development. they're supporting us in getting it done and we have done, we've taken steps to repeat the process so we can get this data done in the 90 days. my second point is that nerc has a number of important tools beyond the use of standard to address physical and cybersecurity. we operate the industry's information sharing and analysis center, that allows us to share threat information and other security information with industry and also collect information from industry and share with our government. the transit operates in a controlled and confidential environment so that the information that we shouldn't is maintained and secure. isac. but we also have a system of alerts since january 2010 with issue 27 o, lord the industry covering a number of physical and cyber issues.
and immediately following the mad cow incident last april on the very next day on april 16, we provided an alert to industry outlining the methods and tactics used in the metcalf attack and what industry should do to address the issue. i believe we have the most robust private public partnership between industry and government to our electricity sector coordinating council. we have approximately 30 ceos, the ceos themselves meeting on a quarterly basis with the top officials from the various government agencies including the white house, homeland security, d.o.e., nsa, fbi and so on, meet quarterly and we discuss what actions we can take to improve information sharing, incident response and tools. nerc facilitated last november a great exercise and i think was
an opportunity for us to demonstrate our readiness but also identify what areas we needed to improve in terms of ensuring security and reliability. my third point, madam chair, is in direct response to the question of the hearing, keeping the lights on, are we doing enough? my answer is we're doing enough. we're doing the right things and we're doing the right things on a prioritized basis and we're making progress and continuously improving. the metcalf incident was serious but it's also a good example of the resiliency of the grid. no customer outages occurred during that incident. but also metcalf is an important turning point. it's a signal about looking at physical security from a different perspective, not just keeping bad people out of substations but other aspects of security. but in the context of all the things we look at, physical and cybersecurity, there are many other issues we have the way.
we have issues with operator training, human error, equipment failure to we want to make sure we take the cyber and physical aspects and contact. thank you and look forward to questions. >> thank you. ms. kelly. [inaudible] >> my name is sue kelly. on the president and ceo of the american public power association, appa is a national to associate based in d.c. the rep since more than 2000 not-for-profit entity owned electric utilities in 49 states. i very much appreciate the opportunity to testify. today i represent investor owned, cooperatively owned and publicly owned utilities and canadian utilities as well. for very legitimate reasons we often have different views on the policy issues facing our industry but we all have come together on grids duty. we all supported section 215 that was passed in energy policy
act of 2005, and given the changing nature threats to the grid would also work with d.o.e. and dhs to develop the electricity subsector courtney the council, escc. the overall reliability, keeping the lights on for both ourselves and her neighbors is of the paramount importance to electric utility. because electricity is consumed instantaneous and follows the path of least impedance, ensuring reliability and grid security is a collective effort in which we are all engaged together. cyberattacks commuter logical events, potential jurors acceptor and much of the public discussion on this issue in recent years a utilities have planned for physical threats. unlike subsidy threats, threat to been around for many years. utilities take these threats is a and we deploy measures to mitigate them. the sheer size and in some cases the remoteness of the infrastructure requires we prioritize the facility and
concentrate on the ones that if damage would have the most severe impact on reliability. simple risk mitigation techniques like cameras and locks can help address routine problems, but the key to electric utility physical security is defense in depth which relies on resiliency, redundancy and the ability to recover showed an extraordinary event occur. while i systems are built to withstand attacks, successful attacks can happen. we use modeling to build redundancies under the system to support most critical assets. since we have over 45,000 substations in the u.s., advertising those critical assets and focusing or planning on them is extremely important. in recent months a few high profile attacks on physical infrastructure has drawn increased scrutiny. one such incident took place at the metcalf substation in california. shooting its substation a fortune is not uncommon. but this incident them straight and level of sophistication not previously seen in our sector and we been working to understand it and to share the
lessons learned from it. government and industry conducted a series of briefings across the country and in canada for utilities and local law-enforcement to help utilities learn more about the attack and its potential applications for them. appa and her fellow electric sector could associations take this incident very serious look at the notion that recent media stories sadly spur our industry to action or some out enhanced grid security are in active. these briefings were initiated prior to these stories. however, in response to the metcalf incident on march 7, ferc directed nerc under section 215 to submit proposed rule of the standards on physical sector to within 90 days. appa and our members along with many other industry stakeholders are actively engaged in the nerc process right now to develop this important standard. turning to cybersecurity, appa believes this way to enhance security cross critical infrastructure sectors is by improving information sharing
between the federal government and these sectors but we have supported information sharing legislation that passed the house and look forward to reviewing the senate version. so far the cyber related sector -- section 215 have prevented a successful cyber attack. but that doesn't mean it's not going to happen. the industry applies -- cybersecurity will have to be an iterative process as the nature of the threats continue to revolve. finally, i have to note that the partnership coordination and sharing of relevant threat information is crucial to grid security. at the national level to place an essential role in coordination and information sharing. it has representatives from trade associations, ceo of public power utility, world co-ops, the pma, and escc never scored it with and periodically meet with officials from the white house, d.o.e., gauges,
federal law enforcement and national study organizations. this dialogue is focused on three areas come tools and technology, information sharing, and incident response. in conclusion, appa on behalf of the entire electric industry would like to reaffirm the industry's ongoing commitment to protecting critical electric utility infrastructure from both cyber and physical threats. to do this we have to work in partnership with all levels of government and local law enforcement, canada of, except department. confidential information sharing and tools and technologies are needed. thank you for the opportunity to appear before you today. >> thank you, ms. kelly. chairman honorable. >> thank you. good morning, chair laughter, ranking member murkowski, and members of the committee. my name is colette honorable. unprecedented national association of regulatory utility measures, and chairman of the public service committee. , commission. thank you for the opportunity to testify about the security of
our nation's electricity grid. there are three main thoughts i wish to share with you this morning. first, state utility regulators share your concern about the resilience of our grid. for us it is job number one. second, the resilience our ratepayers expect include only security from physical and cyber attacks, but also the ability to bounce back from severe storms and accommodate the impacts of markets and regulatory changes. finally, naruc and the state of our taken several important steps toward a more resilient grid, and we welcome this conversation about what more can be done. the seriousness of the metcalf incident must not be discounted. however, physical threats are but one of the many challenges utilities faced each day. these vulnerabilities can take the shape of a sophisticated metcalf style attacks, are in a system such as hurricanes and the. in arkansas we've experienced
consecutive 100 sure i storms. along with vandalism on our electricity infrastructure. last august a locus in allegedly attempted several physical attacks on the electricity infrastructure in central arkansas. the suspect was apprehended in october and after admitting responsibility, was indicted on several federal criminal violations. the joint terrorism task force and local law enforcement responded swiftly, engage with respected utilities and met with me and my staff during their investigation. this is a shining example of a federal-state and utility cooperation. economic regulators view these challenges to the broad lens of resilience. with severe weather seemingly more frequent, concerns going over cyber and physical security, along with the general day-to-day operation of the transmission system, providing reliable service may not be enough anymore. so what are we doing to improve
resilience? the utilities own and operate the infrastructure and they know or should know their systems better than anyone. therefore our utilities are ultimately responsible for safety and security. but as the regulators can we acknowledge it is our responsibility as well. the public has for the most part faith that the utility system works, but this faith can be shaken following a prolonged outage or devastating pipeline accident. as citizens can we are thankful for federal, state and local law enforcement and intelligence officials who are focused on criminal accountability and national security. as a regulator, our duty is to ensure reliable service in the face of all threats, no matter the source. the good news is that despite these vulnerabilities, our citizens are indeed resilient and entities that own and operate them are skilled at restoration when something goes wrong. although customers will at times become disgruntled when the lights go out, the industry does
an excellent job of over all restoring service. utilities spend billions to train, educate and trail employees and maintain physical infrastructure so that the lights are restored as quickly and as safe as possible. it is here that the role of the states is paramount. we are responsible for setting the rates for the nation's investor owned utilities, and the regulations that govern them. we determine who pays how much and for what they are paying. state commissioners take this role very seriously and it is solely our responsibility. my colleagues and i must weigh the cost of every proposed improvement to the systems under our jurisdiction against the risks and benefits of how these investments will impact consumers. the people that we serve. in the in we would like to all have the safest most reliable system possible, and that is everyone's goal.
at the naruc level we're doing a tremendous amount of outrage in education through workshops, seminars, training, participation in the escc, and more. we are incorporating a multitude of challenges the industry faces. we are also preparing for new federal emissions reduction rules that will have different impacts throughout the country. while many states have taken great efforts to reduce carbon emissions well in advance of any federal and environmental regulation, some of my colleagues have concerns regarding local reliability issues due to the retirement of the higher generation industry. state commission seeks investments that deliver the best systems improvements and ratepayer value. whether these investments address physical or cybersecurity, they must prudently meet the prevailing expectation of reliability and affordability for the ratepayer.
this requires appropriate dialogue and discussion in an open and transparent way. we rely upon the utilities to know where vulnerabilities may be and we expect industry to communicate with us so that we can best determine how to move forward. in conclusion, as we've seen across this country, states are pursuing innovative approaches to ensuring grid resilience. while naruc does not endorse any particular of program, we can learn a great deal from those who are pushing ahead. typically the general public doesn't think about utility resilience unless it is after a hurricane or other disaster that knocks out power to millions. but we hope that through these types of discussions and improved coordination we can all become better prepared and naruc and the states are committed to do that. thank you for the opportunity to address you this morning. >> thank you all very much. take you for abiding by the time because we do have a very
important subject to try to cover. and, unfortunately, we will have votethose at 10:30. will try to keep the hearing moving and will keep a ringtone. before we start i'd like to call the attention of the members to document that the staff provided, particularly at age three to really understand the interconnectivity of this grid. it says here that the are actually three into in its regional grids, the western grid, eastern grid and then texas has its own grid. but hawaii is not on your, neither is puerto rico or alaska. so i want to stab to upgrade this list. this -- upgrade this document. but the reason i call it to your attention is, as all of us are very supportive, but on both sides of the aisle about the importance of state authority,
it's really impossible to keep this grid stood up without regional and national cooperation. and this document clearly shows the interconnectivity as well as into candidate. so it really doesn't take a combination of all as you've mentioned, a federal, regional, and state as well as private entities. so it really is a quite complex and important subject. let me start my first question to you, ms. lafleur. what are you doing specifically to respond to mr. friedman, inspector general's, management alert yesterday that said in part, and i'm going to submit this for the record, the department subject matter experts have confirmed that at least one electric grid related greeted by the commission staff should have been classified and
protected from early at the time it was created. this document and others, the essence of this content may in whole or in part have been provided both federal and industry officials in an unclassified setting. that was not appropriate. the messages integrating into stripping this document let us to the permanently conclusion that the commission may not possess adequate controls for identifying and handling ossified national security information. -- classified. could you just comment about what you are doing, again, to implement these and what additional steps that you may be taken as the acting chair to make sure that this doesn't happen again? >> well, thank you for the question, madam chairman. we are meticulously following, first of all, the instructions of the inspector general's
management alert, which means gather, we met with him privately to understand the documents he was speaking of, gathering any paper copies we can find in putting them in a secure information facilities, wiping and scrubbing all databases, computers, and any portable devices across the commission to make sure that the documents in question that potential it should have been classified are protected. and instruct us to reach out to the do it on the classification level going for but it includes reaching out to former employers include our former chairman and trying to get our arms around any information that may be out there. that's part of the instruction. >> can i ask you this? does ferc have a high level person at ferc that's responsible for trying to help? have you all stood up any
additional resources in that sphere in the last few years? >> yes. we have our chief security officer as our classification authority. he has delegated or derivative classification authority under the navigation from the d.o.e. and our general counsel has been very involved in this also. since it happened we've taken a number of steps internally. we sent out a reminder to all employees of the regulations that govern information security. i've ordered a full internal review, kind of a chain of custody of all the documents when they were created. were giving that to mr. friedman's people, and ultimately what we need to do is develop a crisp and clear internal process so we understand what information we are creating an have a process where the right professionals get a chance to weigh in on what level of classification it should have. >> thank you.
mr. cawley, let me ask you this. i understand you testified and i generally agree that the private sector is doing a very fine job under difficult circumstances. there are lots as ms. kelly said, a lot of different views, different sizes, different countries, different nature of entities that are involved in providing this critical infrastructure for our country. but when you said that you thought and she was doing all it could, i understand in the metcalf incident that there were no cameras facing to the outside perimeter, only to the inside perimeter. can you comment about that? and wind and what action has the industry taken sense to me be faced the cameras in a different direction to see who might be in the area that shouldn't be? >> i think common and best practice prior to metcalf was primarily focused on keeping not
only bad actors but children, just for public safety, keeping people out of the substations. we have a very experienced driven lessons learned driven industries i think they were focused on what they thought was the threat. i think that's the valley of metcalf, in looking at in hindsight, there are opportunities to improve it. my understanding without disclosing too much is that there has been a change in the perspective of both how the cameras and lighting and motion detection and other devices that would help protect it further. and not just at pg&e but around the industry. >> okay, thank you. and one final question in each of you just hit us very quickly and i'm going to turn it over to senator murkowski. i generally am very strong supportive of public-private partnerships. i find them in many areas, and, of course, we all do, to be very effective and unique in some ways in the united states.
they don't operate that way in other parts of the world, and i think that is generally what our constituents believe is a very effective way to handle some government responsibilities is to do it with the public-private. so nerc and ferc represent the best of that with ferc been the best of the right sort commission, nurturing the private sector. how each of you all, starting with you, ms. lafleur, say how this is working and maybe quickly give one example of some improvements that you could think of. >> really into, we've only been at this between ferc and nerc close to eight years, and i think it's working quite well. and i've made -- with a somewhat unique hybrid system where the old voluntary system of nerc guidelines has superimposed on this compliance system with a
million dollar a day in the but that's an odd marriage. so there were some tensions in the beginning i think what's really helped is the work we've done together to set a set of priorities because of the hybrid system we have had the same reliability rarities, even though we might disagree about exactly what to do to get there. and that i think the communication at the top between the two agencies is what has led, and jerry has led a culture at nerc of learning and setting parties are what happen. i think that priority setting is the biggest step that we have taken to make the standards better which is what keeps reliability going. going. >> i think the model is working really well and it's almost necessary because it's such a complex electric grid. it's interconnected internationally with canada and mexico, that we are able to bring the expertise of industry together, able to work ou out te standards in a way that no unintended adverse consequences,
and get the buy-in from industry. yet we have the oversight and direction and guidance from ferc. they have exercised that a number of times. they push back on some standards and they directed us to do a standard to protect against solar magnetic disturbances. i think with the best of the public interest being represented in government oversight with the expertise and full understanding how the grid works from industry. >> ms. kelly? >> i would generally concurred in what chairman lafleur and gerry just said. i would add i think we're moving past our adolescence and into early adulthood. there have been some bumps along the road, but one of the things i would point to as an example of ongoing cooperation is the phrase in statute users owners and operators of both our system is pretty broad. in syria, anyone who turns on a toaster is one of those people. when the scheme was first enacted and implement it we had to figure out who that universe was and would make an initial cut but we are now going back
and nerc is taking a second look and deciding who truly needs to be in and who can be out. going back to your discussion about the number of small co-ops in louisiana. it may be that some of those entities really do not impact the bulk power system and, therefore, could be exempted from the scheme without adverse impact to the system. i think we're taking a closer look at that and they think i welcome that because, frankly, that frees up resources to concentrate on the entities at this is that truly do impact it. so i think that's a perfect example of how if we're moving forward we are refining the regime and improving it. >> so a tighter biscuit base would be welcomed. >> correct spent all right. chairman honorable. >> thank you, madam chair. i concur with the comments of both the chairman and of mr. cauley and ms. kelly. naruc in fact supported this legislation that created the ferc and nerc partnership.
and certainly in the real world sense, once these standards are implemented, retail investor owned utilities come to their respective state commissions for recoveries to integrate the government these standards, and certainly even in arkansas we have a approved cyber standards investment even in the last year. so we expect the utilities to keep these standards and we also plan to stand to be ready when this request, our way. >> senator murkowski. >> thank you, madam chairman. and thank you, chairman lafleur, for your responses to chairman's questions here in terms of those steps that you are taking at ferc to implement or act on the igs recommendations. i think it's going to be critically important moving forward. i was going to ask you what you might be doing to strengthen the
culture within ferc that supports the work of the professionals. you know, i hear you say that a notice to the employees has gone out, reminding them of certain aspects, certainly of the confidentiality. but that may be an area that you need to look to more critically. i'm not going to suggest how you might be doing your job year, i do think that is going to be an important aspect. in this vein, i want to just make clear that you understand what you will be receiving from the as the chairman of ferc, you're effectively the chief executive to whom the agency staff reports. and i'm going to be asking the agency'to more extensive questions about the handling of documents and supporting materials such as those that are referred to in the igs management alert. i'm also going to have some
the full cooperation of the agencies, its leaders in the senior executive service and other very dedicated federal employees who support them in getting full and complete and of course prompt responses to my questions. >> well, you will absolutely have our cooperation and hopefully a lot of them might be the same questions we've been asking ourselves. i agree with you about your comments on culture. first of all i think in many ways ferc has a very strong culture. in all the decade i've been dealing with ferc i never known a merger rumor to leak or all the confidential information ferc deals with day-to-day which is not to say we absolutely need to learn the lessons what happens here but i think we deal in confidential information in our dockets all the time. but i've given this a lot of thought and i think culture starts at the top. when i ran an operating company the ceo and everyone had to take a lot of safety tours because i
put in place a rule, anyone, even a brand new trainee could stop a job if they saw any electrical safety incident of any magnitude because that is how you convey safety is important. i think here the culture of respect for confidentiality and has to start at the top as well. and we need to make sure that everyone knows that they can ask questions and before information is created, and as that process goes along, to make sure we're doing it with care and with attention to asking the right professionals to weigh in on classification or how it is treated, how it is filed or anything else. i will take accountability for that, because i think it has to start at the top and go all the way through the organization. >> i appreciate that. chairman, honorable, i don't know why both of us seem to have difficulty with your name and title here this morning, you spoke a lot about the reliance of the grid, the resiliency of the grid. i think, we, we acknowledge and
accept that there are, are risks that present themselves when comes to reliance. you mentioned outages that are caused by hurricanes or major storms. i think people can kind of relate to that. but, as we are seeing more assets, energy assets, retiring, there's kind of a quiet consensus out there that the risk of a localized reliability event or, effect is growing. and i guess the question to you is, how acceptable of a risk is this if, if the impact to the reliability is caused by federal policy? and when i say federal policy, the, the push within this administration to move coal out? the fact that we're seeing so many coal facilities going
off-line during the polar vortex this winter. we saw that i think it was 89% of the coal electricity capacity that is due to go off-line was utilized as that backup, to meet the demand this winter. so i think folks are prepared to accept a level of risk. you have an outage, when you have a really bad storm but to what extent do you think they accept the risk if that is brought about by federal policy? >> thank you for the question, senator murkowski. this is really a great example of the many challenges that economic regulators face across the country insuring reliability. this, so your question is, how acceptable is it? for the economic regulators it is not acceptable. >> right. >> we for that reason have been very engaged with the epa, with
the personnel, even with administrator mccarthy about this very important topic of reliability. we are charged with insuring reliability. it is our main core focus in addition to insuring safety and affordable utility service. the utilities on the front line must insure reliability. when there's a disruption to the grid or an outage for any the utilities on the front line to make sure that the lights come back on, that the generation is moving, no matter the source. we at naruc certainly don't pick winners and losers. we embrace all of the above energy approach, and senator, i know you do too. i heard you say that very thing. we believe coal is a low-cost option and that it should be a part of our energy mix. we therefore, working with the epa to insure they hear us. at our november naruc committee
we issued a ruling regarding the 111-d process, that to insure states have flexibility. that the federal government respects the role of the states. that the epa also honors this notion of diversity. we embrace that as economic regulators. the fuel mix in one state is very different from another. states such as kentucky or west virginia, or indiana very heavily rely upon coal and so any rule makings that impact a state's generating mix will clearly be important to those states but clearly all of us as economic regulators. i appreciate the question. i want all members of the committee know we're working every day literally on this issue and we are a constant voice in helping all of the stakeholders around this issue continue to remember the
importance of reliability. it's job number one for us. >> thank you. >> thank you very much. senator franken. thank you so much for your leadership and interest on this subject. >> thank you, madam chair. thank you all for your testimony. i agree with chairman honorable -- >> excuse me a minute. i will go vote and leave senator cantwell in charge of the committee and i'll be back. please continue. >> sure. i agree we need state flexibility in addressing those kind of issues especially new rules epa will make on existing coal-fired plants. we're talking about grid security. it is a serious issue. the attack on the metcalf power substation in california is one that could have happened anywhere in any number of substations across our country. as chairman of the energy subcommittee i want to make sure we're doing everything we can to
secure our electric grid. that's why i sent a letter along with senators wyden and reed and feinstein to our regulators advocating for stronger security measures and pleased an order has been issued to strengthen grid security. thank you for that. as we take steps to secure the grid i think it is really important we engage the law enforcement community, both at the federal level and at the state and local level. they are critical partners in the effort to secure the grid. chairman lafleur, mr. cauley, can you explain what you're doing to insure that law enforcement agencies and officials are fully integrated into the efforts to secure our power grid. >> well, thank you for that yes, senator. i'll mention two things. the order that ferc issued on march 7th on requiring physical security standard, one of the things it requires is that after the critical facilities list is done each asset owner identifies specific
threats and vulnerabilities of each facility. and it contemplates that they involve government agencies such as law enforcement in assessing the threat and vulnerability of a particular facility because who knows better than the police, location, geography and so forth. in addition, ferc and other agencies, dhs, and fbi, have done 13-city tour around the u.s. and canada to explain the lessons of metcalf and local law enforcement is one of the main attendees as i understand it at these meetings because obviously, as you said it could happen in any community. >> thank you for the question, senator. i actually personally believe that the most important and most effective security measure we can take is the relationship between the utility company and law enforcement. we recognize that years ago. why i mentioned we have a standard already, we had it for many years, that requires if there is any issues of incidents
related to physical or cybersecurity that they must get reported to the local law enforcement. we require companies to have preestablished contacts with their local law enforcement. i think having that presence and that response capability is very important. we also participated in the outreach. i went to one of those myself. a third of the room was law enforcement in addition to first-responders and power companies. i think going forward to we need to emphasize that further. i anticipate facilitating one-on-ones between utility companies and law enforcement and first-responders to make sure in general they understand our critical infrastructure but specific stations which are most important, what kind of response would be expected. >> thank you. and in that way metcalf was a wake-up call. we all agree on that. the reliability of the electric grid is essential to our energy security. we're seeing more extreme weather events and those can have serious effects on the grid
but distributed generation makes our grid more resilient by allowing critical facilities, military bases, hospitals, others, the to stay online during an outage. that is why i worked closely with senator murkowski to introduce an amendment to the shaheen of portman bill to support combined heat and power district and energy and other distributed generation technologies. i know that senator murkowski has a lot of constituents in her state, in the areas that are far away from a centralized grid and she really understands the importance of the issue. ms. lafleur, what is ferc doing to support deployment of combined heat and power, district energy systems and other energy systems that operate in island mode? >> well the, our responsibility
is primarily for the interconnected interstate grid. we work in partnership with state regulators who have more responsibility at the distribution level within a state. what we've primarily done to support the growth of distributed generation is to make sure that our market rules in the 2/3 of the citizens that are served by competitive markets, that these, these distributed facilities can compete fairly and get paid for their electricity. we have a, put out a rule in 2013 on small solar installations. we've done rules on flywheels and on some of the storage applications, demand response, which often relies on backup generation in hospitals and so forth and others. we're trying to make sure that there is fair compensation for them in the wholesale markets that helps those grids thrive. >> thank you. because i just believe that resiliency of the grid, i mean we saw, in superstorm sandy, we
saw places where they were operating in island mode, that it was a good thing and, it was a good thing for data storage and those kind of emergencies. >> i can never resist a plug for my alma mat you are princeton which kept the micro grid up an supported law enforcement i think across much of new jersey in the micro grid in hurricane sandy. >> absolutely. that is exactly what i'm talking about. thank you for bringing up princeton. >> senator risch. >> thank you, madam chairman, madam acting chairman, thank you very much. first of all i want to thank chairman landrieu for holding this hearing. the security of the electric grid is critically important to most americans and as with many, many things, most americans don't realize how important it is to them. when an incident happens then everybody starts to wringing their hand say why didn't we do this and didn't do that. i want to focus on something
that is available to electric utilities and the government agencies that a lot of people don't know about. in my state in idaho we have a facility called the idaho national laboratory. it is the flagship laboratory for nuclear energy. has been since the 1940s. it is the lead laboratory in america for nuclear energy. what most people don't realize, and the reason it is that, because that is where the first reactor was built, the first electricity was generated and first light bulbs lit but what most people don't realize they have a lot of other missions and one of them is exactly what we're talking about and that is grid security and since this is a relatively, and i use the word relatively, new area of focus although electric utilities have been focused on this for many, many years, it has become so sophisticated that it takes much more than what would be an ordinary effort. at the laboratory today there
are a number of facilities everyone should be aware of. number one, we have a full, full-scale, i want to repeat that a full-scale test grid that can be used to verify and validate modeling and research which is being done on the grid. and that is being done there. we have a test bed. this is a joint program with sandia national laboratory. it supports industry and government efforts to enhance the cybersecurity of control systems being used throughout the electric industry, not only the electric industry but also oil and gas industries. thirdly, they have a wireless test bed and indeed we started improvements on the wireless test bed and we're going to continue to do that. and as we all know, there are more and more every day components that are being connected to the grid that are wireless. so this wireless test bed is extremely important. , as we move forward wit g